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nhamlin
ParticipantI am a real estate investor in San Diego and have given a great deal of thought to buying a place in the mountains.
If you calculate the annual cost of maintaining a nice home and divide by the number of days of use, you will often find it more expensive than the staying at the Waldorf with hot and coldf running blodes. Ever wonder why resort areas have more real estate offices than service stations?
You can reduce the costs by renting it out but when you go there, you are now staying in a rental.
My attitudes were formed when 40 year old beat up 2 BR 2 BA condos at Mammoth were selling for well over $300K. Things would look a lot better with current pricing. Things would also look better for someone who plans to eventually retire there.
It sounds like you can well afford to take the plunge. I think you might have regrets if you don’t. As for the bad financial new; the time to buy is when blood is running in the streets. I doubt that there is a lot more bad news coming down the road for Mammoth.
ParticipantI would encourage you to investigate an installment sale. You can delay a lot of the taxes. You can usually get a slighty lhigher price with owner carryback financing.
I would suggest getting a good downpayment and a substantial prepayment penalty. This will allow you to collect interest on money that would immediately go to the IRS if you did not elect the installment sale.
If you do an installment sale, you must carefully evaluate the buyer. If the buyer has other property, you may cross collaterize to increase your security.
Norman Hamlin
[email protected]ParticipantI would encourage you to investigate an installment sale. You can delay a lot of the taxes. You can usually get a slighty lhigher price with owner carryback financing.
I would suggest getting a good downpayment and a substantial prepayment penalty. This will allow you to collect interest on money that would immediately go to the IRS if you did not elect the installment sale.
If you do an installment sale, you must carefully evaluate the buyer. If the buyer has other property, you may cross collaterize to increase your security.
Norman Hamlin
[email protected]ParticipantWith interest rates climbing holding cash is much less painful than it was a year or so ago. Investment real estate has some wonderful tax advantages but the depreciation deduction is not a real big deal. If you buy a $1,000,000 apartment property with improvements valued at 75% of purchase price your annual depreciation deduction is only 750,000/29.5 yrs = $25,000 for a tax saving of about $12,000 ignoring AMT considerations.
Some day that depreciation deduction will have to be recaptured at a tax rate of 25% (assuming tax laws don’t change.)
About going out of town. I have heard several stories that began: I was an inexperienced investor and I decided to invest out of town. I figured the locals didn’t know what they had. Very few of those stories had a happy ending and several had tragic endings.
A few months ago Greenspan gave a speech that was not double talk. He very articulately expressed some sentimens I have had for some time. The gist of the speech was: Investors have forgotten the concept of investment risk and premiums for accepting that risk. Investors have been purchasing risky investments for nearly the same price as safe investments with similar investment returns. He believes that the concept of a major economic downturn is being totally ignored in the pricing of assets.
He finished by saying that “When that has happened in the past it has usually ended badly”.
This has happened in most or all asset classes. Some obvious ones are the spread between treasuries and junk bonds. I don’t know where they are today, but a few months ago the spread was at an all time low.
In real estate terms City Heights apartment buildings were recently selling for only slightly less than North Park Properties. North Park is a much superior neighborhood that attracts higher income residents with better credit histories and fewer bodies per unit. As the apartment market has softened North Park Prices have held up much better than City Heights Properties. I think that process is just beginning.
The point being virtually all assets are currently over priced and in the process of being re-valued. Cash is still trash but it is changing fast.
Any little hickup on the international scene, could lead to a tightening of credit. A perfect example is the monetary tightening going on right now in Japan where short term interest rates have been at zero for a decade.
My suggestion: Pay your taxes take pride in being such a good citizen. Put your money in very safe short term debt instruments. With today’s flat yield curve there is little or no premium for buying long term debt instruments.
Norman Hamlin
[email protected]ParticipantIf you liked your home and you like San Diego I would recommend that you pay off the house. If you consider the costs and inconvenience of buying and selling plus the loss of a low property tax basis, I think you would find that it would take a really large price drop to come out ahead.
On the other hand you have thrown the possible Orange County Move into the equation. How certain is that move?
I believe the things that Rich Tuscano says about a housing decline in San Diego. Am I positive the crash is going to happen? Absolutely not. I also believed some other smart people that told me CDMA technology would dominate the worldwide cell phone business and Qualcom was a great buy at 30% more than today’s selling price.
There are no sure things when it comes to investing. We could have another bout of raging inflation or we could replace a large number of poor peoble with a large number of rich ones. The direction of markets cannot be reduced to mathmatics.
A house is a very special thing even to someone who works 80 hours per week. Living in a rental is just not the same.
Would you have more money in five years if you sell and rent? Probably. Is it worth the agravation and risk?
If prices actually crash, that house in the beach area of Orange County will drop a great deal more than your Chula Vista house. The spread between your present home ant the O.C. home could easily shrink several hundred thousand dollars. I for one would be happy with that improvement. I do not like to speculate on my personal residence.
My recommendation is stay where you are until you are ready to move.
Norm Hamlin
[email protected]ParticipantYou are exactly correct for several reasons.
If you have a high interest loan but the same house payment as a lower interest rate loan several good things can happen. you can make extra principal payments which are the equivalent of investing money at the 12% rate. If Rates drop, you could refinance and have a far lower payment. Alternatively you could refi at the lower rate, make the same payments and have large principal paydown.
If you buy while rates are low and prices are high there is not much more good news to be had. If rate rise dramatically the market value of your home will drop. If rates do not fall, you will have a very large loan and will pay on it forever.
I cannot imagine a happy ending to a story that starts out: Once upon a time I bought a house when rates were at a record low and people were paying such high prices that their payments were at record levels relative to income. Then rates went up dramatically.
Remember that an increase in rates from 5% to 7% means a 40% increase in interest payment! It was not that long ago that 7% financing looked like the impossible dream.
Norm Hamlin
[email protected]ParticipantI think you are missing a very important consideration which is capital gains taxes. I get the idea that this is your personal residence. If so you can sell and take advantage of the $250K capital gains exclusion.
If you convert it to a rental and hold it for more than 3 years, you will be faced with capital gains taxes on the money you have already pulled out!!
Ask yourself how much appreciation would be required just to break even if you rent this house for the next 3 years. Also consider the advantages to selling a home that you owner occupy.
A tenant occupied property will rarely sell for as much as an owner occupied property. If you try to sell a single family rental, the tenant has a motivation to sabotage the sale. He may interfere with showing, refuse to keep the place clean and picked up, and bad mouth the property to prospective buyers. You can always vacate the property but then you increase your negative cash flow.
If you owner occupy the house, you can keep it clean and cooperate with showing.
Norman Hamlin
[email protected]ParticipantRevenues probably won’t drop as much as you think. Remember the State of California is the big pig at the trough when it comes to property tax collections. The city and county get a fairly small portion.
Secondly, Only people who purchased in the last few years will benefit from a reduction. Many of those will not bother to file.
Finally there will be some offset caused by people selling property that was purhased more than five years ago. Even with a drop in values, the large number of properties with very low tax assessments will offset any drops that occur due to re-appraisal requests.
Norman Hamlin
[email protected]March 15, 2006 at 5:23 PM in reply to: is this too much affordable rental housing for san diego? #23684ParticipantI challenge the assertion that the City of SD has good intentions. Imagine you want to drive up the cost of housing. How would you go about it? You would:
1) Downzone large areas of town such as Hillcrest, North Park, and Beach Areas.
2) Require many years and $ Millions in legal fees and environmental impact statements to build a project of any size before moving dirt to build housing.
3) Increase parking requirements, set back requirements, and decrease floor area ratios.
4) Divide the city into a multitude of planned districts each with endless arbitrary requirements that give planners unlimited opportunities to delay or reject projects.
5) Increase fees for permits to $35,000 per unit. Thats before you move any dirt or buy any concrete. The rent required for an apartment project to support the cost of fees is roughly $250 per month.
6) Give most of the revenue from property taxes to Sacramento and the cost of fire police and schools to the city. Give sales tax revenues to the city. See how long it takes a big box store to get permits and then see how long it takes to get a residential project permitted. Guess which takes longer?City officials claim to be concerned about housing. If they were really concerned they would search for ways to reduce the costs to those who provide housing.
When the time from land acquisition to commencement of construction goes up cost and risk go up. Developers are forced to spend huge amounts of time and money before they even know if they can build. Even if they succeed in building the project, they may begin during a strong market and finish the project in a weak market.
Norman Hamln
[email protected]ParticipantResponse to question about the effect of interest rate increases on affordability.
In the early stages of mortgage rate increases Housing affordability will certainly get worse. In fact, affordability may worsen right up until the time that rates flatten or start down.
Consider upside potential from a buyer’s standpoint. Would you rather have a $1500 payment at 9% or at 5% assuming each is for the same house? I would certainly prefer the 9% loan. Since the payment is the same, I would owe less money. I would have the possibility of large home price increases as interest rates decline. The 9% rate also gives me a great investment opportunity for making addition principal pay down. Paying additional principal is essentially a safe investment at 9% compounded!
I would also have the option of refinancing later to lower my payment or increase principal pay down.
On the other hand, there is very little upside from the 5.5% loan. There is very little chance for substantial rate drops. If you are buying in that environment, you are probably paying a very high purchase price for the property purchased.
Norman Hamlin
[email protected]ParticipantI would like to respond to the comment about replacement costs. The reasoning sounds good on the surface and the cancellation of condo projects certainly will tend to reduce downward pressure on existing units.
I predict that the writer has not yet had a ring side seat at a real estate down turn. In the mid 90’s many apartment buildings in City Hts sold for under $15,000 per unit. Apartment buildings sold for less than 1/2 the cost of building the fees and permits to reproduce them!!!
During the 90’s I was told by several apartment developers (actually former developers) they could not make a project pencil if they were building on free land.
The building of San Diego like any other city occurs in stops and starts. Remember all the see through office buildings in the early 90’s followed by 10 years of no office building construction.
We have been on an incredible roll for the last six years or so. That is an extremely long time for a building boom but it does not mean that the business cycle or the real estate cycle have been repealed.
The free market system is working even with all of the government interference. Contractors have been making huge profits, their workers are well paid, and people are flocking to the business.
Workers are busy building housing for the people building housing, for the people building housing. Even so it is getting easier to find a contractor to do bid on your project. The cost of building materials is stabilizing as more and more production capacity is brought on line.
When housing slows down, Contractor profits will plummet; building material prices will plummet, and land prices will crash!! In the mid 90’s finished lots were selling for less than the replacement cost of the curbs, gutters, and sidewalks already installed.
I own a 20 unit apartment building with condo permits put on it by a former owner. As little as six months ago the phone was ringing off the hook from brokers wanting to bring me an offer. They no longer call. At one point those permits made the property worth a $40,000 per unit premium over a similar building without permits. That premium has disapeared. That building is worth $800,000 less than it was worth a year ago! How much have replacement costs dropped?
Norman Hamlin
[email protected]
619 692-9496ParticipantI would like to provide some insight on the “flat” market of the early 80’s. In constant dollars the early 80’s was a massive crash. Nominal sales prices were essentially flat for about 3 years while inflation was double digit.
In the sales that did happen, the sellers generally carried back financing at below market interest rates making their cash equivalent sale price far lower than the stated price on sale. The market was also propped up by incredible inflationary expectations.
In mid city area apartment buildings, nominal prices stayed flat while rents nearly doubled!!
My point is: Previous soft landings occurred against a backdrop of rising incomes and high inflation. It is hard to imagine a soft landing in a low inflation environment.
ParticipantA housing unit is a housing unit is a housing unit. When an upscale home is built in Carmel Valley an average of four households will improve their housing situation. The Carmel Valley home may be purchased by someone from Tierrasanta whose home may be purchased by a someone from Clairemont. That home may be purchased by a tenant Mission Valley.
The point of this is Condo Conversions will have no long term impacts on vacancies. When an apartment building is converted to condos, those units are not occupied by Martians. They are typically occupied by apartment dwellers who move in and free up an apartment unit. Yes conversions create a lot of inconvenience for those whose units are converted but it does not create a housing shortage.
I operate 165 apartment units in the North Park University Hts and Normal Hts area. Over the last several years, I have lost many excellent residents who have purchased condo coversions.
In my experience that trend has stabilized and I don’t see that many of my residents moving to purchase their own place.
Vacancies today are noticeably lower than a year ago and obtainable rents are up about 2%. To me obtainable rent is the price at which I would rent a vacant unit.
I do believe that conversions decrease vacancies in the short term. When apartments are coverted there is a period of some months between the time that an apartment tenant vacates and a condo buyer moves in. Considering the number of units in process I would think that number is significant for any given neighborhood. I would love to hear from anyone who can put numbers on how much neighborhood vacancies are impacted.
Norman Hamlin
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